Henry C.K. Liu
The Hollow Ring of Globalization
by Stephen Roach (New York)
It all started in Seattle about 20 months ago. A small band of anarchists and anti-globalists took to the streets and disrupted a high-profile ministerial conference of the World Trade Organization. In the months that followed, similar protests have been aimed at many major international economic gatherings - from Washington, D.C. and Prague to Quebec City and now Genoa. In theory, globalization is all about a shared prosperity - bringing the less-advantaged developing world into the tent of the far wealthier industrial world. But, in reality, when there's less prosperity to share, these benefits start to ring hollow. As the world economy now tips into recession, the assault on globalization can only intensify.
The Genoa summit of G-8 leaders was probably doomed from the start. Pre-summit disharmony over the Kyoto Protocol on global warming drove a wedge between the United States and the other major countries of the world. The Missile Shield proposal of the Bush Administration was only slightly less contentious. U.S.-European disagreement over the GE-Honeywell merger added insult to injury. The world's most powerful leaders were hardly in a mood of reconciliation. Genoa was aimed at face-saving - nothing more.
That's pretty much all that was accomplished. The communiqué addressed the usual potpourri of the world's problems - from AIDS and food security to the digital divide and transnational organized crime. Special mention was made of global poverty reduction - underscoring the need to narrow ever-widening disparities in the world income distribution between the developed and industrialized world. In that vein, G-8 leaders congratulated themselves for continued emphasis on debt relief of heavily indebted poor countries. They also endorsed a call for a new round of global trade negotiations. As always, the communiqué was noble in purpose - but lacking in any semblance of actionable initiatives.
But it was also lacking in context. And perhaps that's the most disturbing aspect of the just-concluded summit. Forget about paying even lip service to the mounting risks of a synchronous worldwide slowdown - to say nothing of our own global recession call. The latest strain of emerging-market contagion - dominated by the nasty turn of events in Argentina - was not even mentioned. Nothing about currencies either - despite looming pressures on the yen. Nor was there any discussion of the post-bubble perils of the U.S. economy. In short, this was a communiqué that could have been written years ago - but for a very different world and an equally different phase in the global business cycle. The authorities are evidently in denial - hamstrung by domestic politics and unable to grasp the context of the broader global economy.
All of this points up the intrinsic tensions of globalization: Market-driven forces of cross-border economic integration are increasingly at odds with the politics of fragmentation and nationalism.
As the experience of 1998 taught us, global policy coordination is both rare and reluctant - it only happens at times of crisis, and on a piecemeal basis, even then. The authorities have come to believe that the best global policies are, in effect, a combination of the best collection of national policies. America's "strong dollar" policy is a classic example in that regard - as are the desires of Japanese and European authorities to resist depreciation of their own currencies. Never mind, foreign exchange rates are relative prices and not all the major currencies can be strong at once. The internal inconsistency of this supposition drives the point home - global policies rarely add up.
In the end, it probably boils down to jobs, voters and the social contracts that bind politicians to these key constituencies. Disparities in social contracts around the world underscore the inherent contractions of globalization. Europe's public welfare state and Japan's corporate welfare state both stand in sharp contrast to America's far more tenuous social contract. Such disparate political values make it exceedingly difficult to merge the world economy into one big happy global village. German Chancellor Gerhard Schroeder said it all in Genoa: "We will not pass laws that create insecurity for employees. We don't want an American-style labor market."
That pretty much lays down the gauntlet for a world in recession: It's each country for itself. In the U-shaped world we envision over the next couple of years, persistently subpar global growth spells rising joblessness in most, if not all, of the major countries. Intensified reforms could add to the upside of mounting unemployment. As always, workers will have the final say about such an outcome in the polling booth. The Japanese electorate is about to render an important verdict on Koizumi's agenda of reform. Germany's Schroeder and France's Jospin are both facing elections next year. And wouldn't it be ironic if George W. Bush faced the same strain of "jobless prosperity" that cost his father his job back in 1992? Stranger things have happened.
In the end, I fear we are all probably guilty of taking globalization for granted. Courtesy of new technologies, trade liberalization, globalized supply chains and the rapid expansion of multinational corporations, most believe it is impossible to turn back the clock on globalization. I want to believe that, as well. But politics could well be the ultimate fly in the ointment.
The cross-border integration of markets - both financial and real - is driven by economics, not politics. The economic version of this model works only if the "outsiders" embrace the market-based system of the insider - the United States. That can only occur if the outsiders follow through by drawing up an agenda of structural reform and deregulation - one that initially displaces redundant workers in an effort to unlock hidden efficiencies. Without such reforms, globalization pits one system against another - in effect, a battle of social contracts.
That's when politics enters the globalization equation. Political disparities can be obscured by upside of the business cycle - especially if that upside is as powerful as it was in the late 1990s. But the same political disparities can be unmasked by a downshift in the global business cycle. That's precisely what's unfolding at this very moment. Politics versus economics - for a world in recession, that battle may have only just begun. One can only hope that globalization will not ring hollow.